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Changes to taxation of dividends – will this change the method adopted by SME’s to extract cash?

 

Posted on 13 July 2015

Dividends paid by UK companies are currently paid with an associated 10% tax credit which satisfies any basic rate income tax liability on the dividend received. The effect of the tax credit is that higher rate taxpayers pay an effective tax rate of 25% on the dividend received and additional rate taxpayers 30.5%.

The proposals announced in the budget are that from April 2016 the tax credit will be abolished. A new system will be introduced under which:

  •  The first £5,000 of dividend income is exempt; and
  •  Dividend income in excess of the exempt amount will be taxed at rates of 7.5% where this falls  within the basic rate income tax band; 32.5% in the higher rate band; and 38.1% in the additional  rate band.

These changes will have a big impact on SME’s who extract large dividends. We recommend that such companies undertake a review of their capital structure, also considering whether dividends should be extracted before the rules change. Smith Cooper specialists would be happy to discuss how these changes may impact you. Contact our expert Jackie Hendley here

To find out about other changes that will be coming into effect from the summer budget, read our full summaries here

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